Peter Hamilton: Where does the duty to advise end?

Earlier this year, a High Court judge decided a case of general interest to financial advisers, in which one had taken over from another because the client was not satisfied with the advice he had received from the first.

Often in such cases, the second adviser is specifically instructed to review the advice given by the earlier one. This was not one of those cases.

Briefly, the facts were as follows. In about August 2000, the client, a Mr Denning, instructed Alexander Forbes Financial Services Ltd to advise on the transfer of his deferred benefits from his previous employer’s final salary pension scheme to a personal pension.

Acting on the advice from AF, Denning made the transfer later in 2000. But he became dissatisfied with the investment performance of the personal pension and the advice he was getting from AF.

In August 2008, Denning instructed Greenhalgh Financial Services Ltd to take over from AF and to provide advice on the management of his investments. GFS was not being asked to advise on the merits of the transfer to the personal pension in 2000.

The terms of business agreed between GFS and Denning were to advise from then on and to arrange appropriate transactions. Once that advice had been given and any transactions arranged, GFS would not keep them under review, and would advise in the future only on specific request. It was specifically recorded that it was not authorised or qualified to give legal advice.

GFS did advise Denning from time to time from August 2008 onwards and no complaint was made of that advice.

In the meantime, Denning pursued a complaint against AF. That was rejected by AF in October 2008 and so Denning took his complaint to the Financial Ombudsman Service.

In 2012, the ombudsman rejected the complaint. Denning then brought a court action against AF but that was abandoned because he accepted the claim was likely to be time-barred.

Undeterred by those setbacks, in September 2014, Denning began proceedings against GFS. The basis of the claim was that:

The advice given by AF in August 2000 to transfer his pension was negligent

GFS negligently failed to review that advice given by AF

GFS negligently failed to advise Denning that delay on his part could cause a complaint or claim to become time-barred

But for the negligence of GFS, Denning would have issued proceedings against AF in or about late-2008 and would have succeeded in recovering damages from AF.

GFS denied it owed any duty to advise Denning upon the merits of the advice to transfer in 2000. It relied on the fact the job it was engaged to do, as confirmed by its terms of business, was to advise on the claimant’s investments from August 2008 onwards.

It also denied it owed any duty to advise on a possible legal action against AF or as to relevant limitation periods. Again, it relied on its terms of business.

GFS applied to the court to strike out the claim and to enter summary judgment in favour of it, essentially on the grounds the claim did not disclose a reasonable cause of action and had no real prospect of success if the case went on to trial. The judge granted the application and entered judgment in favour of GFS.

The judge agreed GFS owed no duty to review the original advice given by AF or to give any legal advice. In particular, the GFS terms of business were clear: they were prospective. In fact, GFS was never asked to carry out a review of the AF advice and did not have the relevant data or information to do so.

In order to do the job it had agreed to do, GFS did not need to review the advice to transfer which had been given and acted upon eight years earlier.

The judge applied the reasoning of a case decided in 1979 in a solicitor’s negligence claim, but generally applicable to professional people, and applied many times. The extent of a professional person’s duties “depends upon the terms and limits of that retainer [i.e. the terms of business] and any duty of care to be implied must be directly related to what he is instructed to do”; and “the court must beware of imposing upon [professional people] duties which go beyond the scope of what they are requested and undertake to do”.

The message for advisers is to make sure the terms of business with a client accurately reflect what the adviser has been instructed, and has agreed, to do.

Equally, those terms must not promise something which the adviser cannot or does not intend to do. So, for example, do not promise to carry out periodic reviews in the future unless willing and able to do so.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk

Recommended

The Investment Association says that “surviving a regulator’s visit is now more difficult than ever” as it launches a course for financial firms in preparation for potential visits from the FCA. In the course prospectus the trade body says firms and senior teams are likely to “come under intense scrutiny” adding that “for many firms […]

Labour is taking its fight against state pension age increases on the road as it looks to win votes in cabinet members’ constituencies. The Government announced that it would implement the recommendations of the independent Cridland review last month, bringing forward the increase in the state pension age to 68 by seven years. Labour rejected […]

Phoenix Life has launched a new portal for consumers looking to fully encash funds under £10,000. MyPhoenix will be available to policyholders aged 55 and over with less than a £10,000 pot, provided they have no guaranteed annuity rates, and will pre-populate a retirement pack and allow the client access up-to-date policy information. The system […]

The world’s oldest mutual lender, Scottish Building Society, has appointed Raymond Abbott as chairman. He takes over the role as chairman from Rob Golbourn. Golbourn will remain as non-executive director until he retires from the board in October 2017. Abbott has been vice-chairman and senior independent director at the society since 2015, and a director […]

By Kunal Desai, head of Indian equities, Neptune Since the election of Narendra Modi as prime minister in May 2014, Indian equities have gone on to outperform both developed and emerging markets. A busy period of governmental and economic reforms, a lower oil price and falling political risk have been the primary drivers over this […]

Newsletter

Latest from Money Marketing

Ingram will be succeeded by Lord Debden, who was previously Apfa’s chair Former Wealth Management Association chairman Tim Ingram has stepped down as chair of the Personal Investment Management and Financial Advice Association board. According to a Companies House filing, Ingram’s position was terminated as of 19 September. He formally stepped down from his Pimfa […]

Seven firms have joined Fairstone so far this year Two more advice firms are joining consolidator Fairstone, adding seven new advisers and £200m in funds under management. Chartermarque, which is based in Glasgow and London, and Hammett & Petch, based in Milton Keynes and Bracknell, have signed up to Fairstone. Fairstone chief executive Lee Hartley […]

this has been an informative article, thanks to the writer, however, had GFS simply recorded the fact and advised the client that the client still retained the right to make a formal complaint at their first meeting to CF, then surly that would have closed to door to them going forward,

When taking on a new client surely all FAs should ask if the client has ever fallen out with or sued a professional adviser? If the hairs go up on the back of your neck – don’t, under any circumstances, engage the client (as you will be next in firing line).

Nice article Peter. It just shows how mad the compensation culture is in this country. GFS had nothing to do with the original advice yet the client insisted on suing them for another firm’s advice because he was timebarred from suing them instead. Madness.

It’s a great article which simply highlights the ridiculous state which now exists in our world.

How on earth could firm 2 be responsible for the client not knowing his own responsibilities having previously instructed firm 1 to effect the transfer several years earlier? There has been enough disclosure and regulation since 1988.

Thankfully the judge saw through what seems to be a pretty vexatious claim.

Why should GFP give that information GFP were given specific the instructions by Mr Denning and acted upon that mandate
Peter last paragraph clearly states what action we should take as advisers.
Yes we have a terms of business but may this should be followed up by letter of engagement specifically outlining what the clients instructions for the avoidance of doubt to both parties GFP had no duty to disclose that information unless specifically requested to do so.
I understand that it is common practice in other professions accountancy been prime example if they receive a new mandate from the client they ask the form firm for a reference and any outstanding matters that should be brought to light. Perhaps, in this litigious world advisers may be prudent to follow the example get a reference. It may save time in the future

Commonsense prevails, for a change.Asking an IFA to be judge, jury and executioner as regards previous advice would set a dangerous precedent, we all have different ways of doing things and it is unprofessional to criticise the work of other advisers.

I prefer to focus on what I will do for he client going forward, and deliver on that promise. The rights and wrongs of what has gone before are for others to decide, equally I will not comment if a potential client is seeking a second opinion.

If a client came to you who had been advised to invest their entire pension in storage pods and Cape Verde hotels, by their previous FCA-regulated adviser, would you help them complain against the previous adviser, or would you tell them to cross their fingers and hope the investments come good because the other adviser had different ways of doing things and it wouldn’t be professional to criticise him?